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Policies encouraging industrial clustering rely on this notion. This column presents evidence that geographic distance is a significant impediment to inter-establishment research relationships in Japan. This friction persists over decades, suggesting that advances in communication technology are no substitute for face-to-face interaction.Since 2001 the Japanese government has been implementing an industrial cluster policy - a set of measures to promote the formation of industrial clusters - in an attempt to promote innovation through the geographical proximity of businesses and thereby improve the nation's competitiveness in the global market. Such policy is being pursued not only in Japan but also in many countries in Europe.The exchange of different types of knowledge through joint research has been found to be an important driver of knowledge creation (See for example Berliant and Fujita 2008). At the same time it has been pointed out that various factors may prevent firms from undertaking joint research. Joint research often requires researchers to be physically working together to discuss and undertake experiments. Geographical distance could pose a major obstacle in this regard. In cases where joint research is conducted via inter-firm collaboration, additional factors - such as the possibility of trade secrets and proprietary knowledge leakage - stand as a significant barrier to creating collaborative research relationships (See for example Häusler, Hohn, and Lütz 1994). New researchOur recent research is an attempt to quantitatively analyse the presence of barriers to joint research from the viewpoint of geographical distance as well as additional barriers in the case of joint research across firm borders (Inoue, Nakajima, and Saito 2013). Using a database based on patent applications published in the Japanese patent gazette, we construct a unique dataset on inter-establishment research collaborations. Then, based on the locational information of each establishment, we calculate all of the bilateral geographical distances between collaborative pairs of establishments and examine the characteristics of collaborative relationships indicated by the shape of the distribution of the distances.Their key findings are as follows.First, inter-establishment collaborative research relationships are geographically clustered. This indicates that geographical distance is a barrier to creating collaborative research relationships, and there is a strong tendency for establishments to seek collaborations with those located nearby.Second, this tendency to cluster geographically hardly changed between 1985 and 2005 despite the explosive development of information and communications technology (ICT) during this period of time. This can be interpreted to suggest that close communications through face-to-face contact are indispensable to research collaborations, and the barrier of geographic distance cannot be overcome even with the development of ICT.Third, regarding the barrier of firm borders, it has been found that inter-firm research collaborations have a higher degree of agglomeration in a smaller geographic area compared to intra-firm research collaborations. This can be observed in Figure 1 below, in which the solid line - representing the distribution density of inter-firm research collaborations - is significantly higher than the dotted line, which represents that of intra-firm research collaborations where the geographic distance between collaborative partners is very short.This indicates that geographic proximity enhances research collaborations. It also shows that shorter geographic distance between collaborative partners facilitates the exchange of visits between researchers and makes it easier for different firms to build collaborative research relationships - for instance, by fostering mutual trust. These effects have been found to be observed more conspicuously in small firms with a single research establishment than in large firms with multiple research establishments.Figure 1: Relative Densities of Intra-firm and Inter-firm CollaborationsThese findings indicate that inter-establishment geographic proximity plays an important role in building collaborative research relationships - an element counted on as a source of knowledge creation - particularly between different firms. This strongly implies that promoting the location of businesses within a proximate distance through an industrial cluster policy could facilitate research collaborations particularly between firms having different types of knowledge, and induce innovation more effectively.Editor's Note: The main research on which this column is based (Inoue, Nakajima and, Saito 2013) first appeared as a Discussion Paper of the Research Institute of Economy, Trade and Industry (RIETI) of Japan.This article first appeared on www.VoxEU.org on October 25, 2013. Reproduced with permission. Reference(s) Berliant, Marcus & Masahisa Fujita (2008), "Knowledge Creation as a Square Dance on the Hilbert Cube", International Economic Review, Vol. 49(4), pp. 1251-1295. Häusler, Jürgen, Hans-Willy Hohn, and Susanne Lütz (1994), “Contingencies of innovative networks: A case study of successful interfirm R&D collaboration”, Research Policy, Vol. 23(1), pp. 47–66. Inoue, Hiroyasu, Kentaro Nakajima, and Yukiko Umeno Saito (2013), "Localization of Collaborations in Knowledge Creation", RIETI Discussion papers series, 13-E-070. 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